Need to Know: For the stock market, bad news is back to being good. Here’s why, says a Goldman Sachs economist

“The federal funds rate is at a restrictive level now. So, if we see inflation coming down credibly, sustainably, then we don’t need to be at a restrictive level anymore, we can, you know, we can move back to a neutral level and then below a neutral level at a certain point,” he said. Naturally, he added that the Fed “of course would be very careful about that,” but he continued: “you’d stop raising long before you got to 2% inflation and you’d start cutting before you got to 2% inflation too.”

That’s a useful backdrop for the latest macro advice coming from Goldman Sachs, on how to trade a soft landing. Economist Spencer Hill finds that the stock market sensitivity to inflation news is now 12 times the historical norm.

“We view the market’s outsized focus on inflation data as consistent with our forecast of a hold at both September and November meetings, because we expect a further decline in inflation to more than offset resilient labor market data and continued positive GDP growth in the eyes of the Fed. Looking further ahead, we continue to expect above-average sensitivity to price and wage data, because progress on the ‘last mile’—the task of lowering inflation into the low-to-mid 2% range—will be crucial for the FOMC’s decisions to stop hiking and eventually begin cutting,” he says.

But even as the market gets excited by the idea of a soft landing, growth surprises aren’t well received. One recent example was the June retail sales report, which generated a strongly negative reaction in S&P futures over the next 30 minutes. In fact what markets are doing is returning to a “bad is good” reaction. “As fears of an imminent hard landing abate, equity investors may actually prefer soft growth data—because growth above the 1-2% channel of 2022 would make additional rate hikes more likely,” says Hill.

That of course is not the first time Wall Street has reacted more positively to bad data than good, with Hill saying summer 2023 has echoes of 2000 and early 2001. “We expect these ‘perverse’ equity reactions to growth data to continue as long as recession fears are on the back burner and the Fed maintains an active tightening bias—which is to say, ‘live’ meetings,” said Hill.

Keep the bad is good mantra in the back of your mind as the ISM manufacturing report and job openings data gets released on Tuesday and the nonfarm payrolls report gets unleashed on Friday.

The markets

U.S. stock futures
ES00,
+0.15%

NQ00,
+0.18%
inched higher, capping off a month in which the S&P 500
SPX,
+0.99%
so far has gained 3%. Crude oil futures
CL00,
+1.12%
were trading above $81 a barrel, while the yield on the 10-year Treasury
TMUBMUSD10Y,
3.961%
was just shy of 4%.

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The buzz

The Fed’s senior loan officer survey, due at 2 p.m. Eastern. highlights the economic calendar that also includes Chicago PMI. Minneapolis Fed President Neel Kashkari said the central bank has been surprised how resilient the economy has been.

Walmart
WMT,
+0.47%
is paying $1.4 billion, according to the Wall Street Journal, to boost its stake in Indian e-commerce company Flipkart.

Ford Motor Co.
F,
-3.42%
was downgraded to hold from buy at Jefferies, which says Chrysler maker Stellantis is its preferred stock of the three Detroit automakers.

Trucking company Yellow Corp. could file for bankruptcy as early as this week, The Wall Street Journal reported.

Best of the web

Niall Ferguson on the potential death of summer as temperatures rise.

Etsy
ETSY,
+4.07%
has been withholding more of its seller funds than other platforms, a report says.

Russian propaganda is making its way into Minecraft and other popular video games.

Top tickers

Here are the most active stock-market tickers as of 6 a.m. Eastern.

The chart

Speaking of the death of summer, the broker eToro put together a basket of stocks to benefit from extreme weather, comprised of names including Home Depot
HD,
+0.50%
(for home repairs) and Carrier Global
CARR,
+3.95%
(air conditioning). As the chart shows, the basket has been outperforming the S&P 500.

Random reads

Nasa has accidentally lost contact with the Voyager 2 spacecraft, at least for a few months but possibly forever, after sending erroneous commands.

These worms have been revived after 46,000 years of permafrost.

Only in Japan, a man spends $14,000 to look like a collie.

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